Question

Dain’s Diamond Bit Drilling purchased the following assets this year. Purchase Original Asset Date Basis Drill bits (5-year) Feb-20 $ 115,000 Drill bits (5-year) Aug-20 118,500 Commercial building May-15 299,000 Assume its taxable income for the year was $76,500 for purposes of computing the §179 expense (assume no bonus depreciation). (Use MACRS Table 1, Table 2, Table 3, Table 4 and Table 5.) (Leave no answer blank. Enter zero if applicable.)

b. What is Dain’s maximum depreciation deduction for the year (including §179 expense)? (Round your intermediate calculations to the nearest whole dollar amount.)

Answer 1

The total assets placed in service that qualifies for Section 179 deduction during the year is as follows:-

Particulars	Amount
Basis Drill bits	115,000
Drill bits	118,500
Total assets	233,500

Please note that land does not qualify for section 179 deduction.

Per IRS, the maximum Section 179 Deduction allowed during 2019 and 2020 is $1,020,000 and $1,040,000 respectively. However, the deduction allowed under the Section 179 would be limited to the company's taxable income. Hence, maximum Section 179 deduction is $76,500

Now, we can calculate the MACRS Depreciation as follows:-

Particulars	Date	Cost	Useful Life	Recovery Year	MACRS %	Portion of Service	Depreciation
Basis Drill Bits	02/20	115,000	5	1	20.00%	100.00%	23,000
Drill Bits	08/20	118,500	5	1	20.00%	100.00%	23,700
Commercial Building	05/15	299,000	39	1	1.605%	62.50%	2,999
					Total		49,699
					Section 179 deduction		76,500
					Total Depreciation		126,199

The Depreciation for any year is calculated as :- Cost of the asset * MACRS rate * Portion of the year.

Please note that we use the MACRS Half Year convention method in order to calculate the depreciation expense as the company has not placed more than 40% of the assets during the last quarter of the year for it to qualify for the use of Mid quarter convention.

Also, with respect to Commercial Building , we use the Mid month convention per IRS. Accordingly, the portion of the year the asset(Commercial Building) was used in service is calculated by:

Total full months of usage + 0.5/12 = 7+0.5/12 = 7.5/12 = 62.50%

Based on the above calculations, the maximum depreciation deduction (including Section 179 expense ) = $126,199